Annual report for year 2016

Transcription

1 Annual report for year 2016 Without change of content, the structure of report might differ from approved statements.

2 CONTENTS Report of the Board of Directors and the Management Board Members of the Board of Directors and the Management Board...5 Statement of Management s Responsibility...6 Independent Auditors Report Consolidated and Separate Statement of Comprehensive Income...10 Consolidated and Separate Statement of Financial Position Consolidated and Separate Statement of Cash Flows Consolidated and Separate Statement of Changes in Shareholder s Equity Notes to the Consolidated and Separate Financial Statements

3 AS EXPOBANK Annual report for year 2016 REPORT OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD Dear customers and business partners, The Latvian economy remains one of the fastest developing economies in the European Union despite the fact that the growth rates in recent years declined to 2-3%. The decline of the growth rate is mainly caused by the global trends weak growth of the European Union economy, weakened Russian economy and uncertainty on the developing Asian markets. Nevertheless, the Ministry of Economics of Latvia estimates the GDP growth of approximately 2.8% in According to the Doing Business 2017 study by the World, Latvia was ranked at a high 14th place competing with 190 countries. In the assessment of creating favourable conditions for conducting business Latvia occupies 6th place among EU member states. The stability of the Latvian economy is also confirmed by international rating agencies. During 2016, they confirmed Latvia s investment grade credit rating: Fitch (A-), Standard & Poor s (A-) and Moody s (A3). For 25 years (hereinafter the ) has been present in both Latvian and international financial markets and is a reliable and stable financial partner, trusted by its customers both during the growth periods as well as in changing, unstable environments. The seeks to provide high-quality and personalized services to its customers, by improving the quality of existing banking services and introducing new ones, as well as offering customers access to the world s major financial centers in Europe and Asia. In 2010, the opened a branch in Cyprus, a representative office in Hong Kong in 2014, and a branch in Luxembourg in the beginning of In 2015, the acquired Walbrook Capital Markets Limited, registered in the Companies register of England and Wales, through which it provides a full range of investment services including trading of selected financial instruments on the major global stock exchanges and off-exchange markets, to its customers. Since 2012, the owns subsidiaries SIA Axi Invest and SIA Kappa Capital, whose main activities are purchasing and developing real estate, as well as selling and managing real estate. The together with the subsidiaries forms a. The year 2016 was another successful year for the. The s net profit amounted to 6,298 thousand Euro, and at the level, 4,156 thousand Euro. Stability remains the key priority of the s activities. This is supported by the `s capital adequacy ratio, which as of 31 December 2016 was 37,6% (individual capital ratio set out by the Regulator is 13,3%), as well as a high liquidity ratio of 116,6% (individual liquidity ratio set out by the Regulator is 60%), as well as a high liquidity coverage ratio (LCR) 267% (requirement set out by the Regulator is 70%). The average number of the s employees during 2016 was 113, including 104 individuals at the. The is medium in terms of its size and focuses on providing services in corporate finance as well as servicing foreign corporate customers that carry out activities on the global scale. The and its branches service customers from over 70 countries. In accordance with its long-term strategy, the continuously pursues a conservative risk management profile tailored according to the best practice of international banks. The `s growth in next years is based on ongoing development of risk management processes and compliance control systems, as well as on improving the quality of s customer base. Moody s Investors Service rating agency assigned the a long-term credit rating B1, as well as rating Ba3 for the long-term counterparty risk. The most significant risks assessed by the in 2016 were identified to be money laundering and terrorism financing risk (in particular taking into account changes in the regulations), credit risk (the places monetary funds primarily with counterparties-credit institutions), reputational risk (the number of publications in mass media in connection with the implementation of new requirements to money laundering and terrorism financing risk management and their effect on the customers has increased) as well as operational risk. In 2016, Latvian regulations in the area of prevention of money laundering and terrorism financing were significantly amended, with the purpose of decreasing the said risk when servicing foreign customers and monitoring their transactions in Latvian banks. In the second half of 2016, review was conducted by the consultants from the USA of compliance procedures in the area of money laundering and terrorism financing for 12 Latvian banks that focused on servicing customers carrying out business globally, including the.. These independent consultants from the USA provided a favourable assessment of the governance culture at the, professionalism of the employees, the quality of the provided training on issues of money laundering and terrorism financing risk management, as well as automated solutions in the area of IT used in the process of daily control and monitoring of customer transactions. 3

4 AS EXPOBANK Annual report for year 2016 REPORT OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD During 2016, while continuing to improve its internal control systems and complying with the requirements of Latvian regulations in the area of money laundering and terrorism financing risk management, the introduced new IT systems, ensuring automated performance of tasks of determining customers risk levels and customer transactions monitoring. Taking into account the long-term strategy of the and its ability to manage money laundering and terrorism financing risk, the defined acceptable level of this risk, which allows the to ensure adequate internal control and risk management system. In order to accomplish goals, stipulated in the strategy of money laundering and terrorism financing risk management, the thoroughly reviewed its customer base. In 2017, the will continue to implement its long-term development strategy by expanding the range of services provided and increasing their availability to customers in international financial centers in Europe and Asia, including by expanding the activities of the s branch in Luxembourg, as well as improving the services offered to its customers. The will continue to invest in IT systems and technologies. The management of the is grateful to all customers and business partners for their trust and loyalty to the, and to all employees for their support and daily contribution to the s growth! Chairman of the Board of Directors Andrew Sergio Gazitua Chairman of the Management Board Ilya Mitelman 6 March

5 AS EXPOBANK Annual report for year 2016 MEMBERS OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD As at 31 December 2016, the Members of the Board of Directors of the were as follows: Name Position Date of election Andrew Sergio Gazitua Chairman of the Board of Directors 11/04/2013 Kirill Nifontov Deputy Chairman of the Board of Directors 09/02/2012 Igor Kim Member of the Board of Directors 09/02/2012 Ingrīda Blūma Member of the Board of Directors 01/11/2014 Mr. Andrew Sergio Gazitua to elect as the Chairman of the Board of Directors of the as of 1 March Mr. Igor Kim shall continue his activities in the Board of Directors as a member of the Board of Directors as of 1 March As at 31 December 2016, the Members of the Management Board of the were as follows: Name Position Date of election Ilya Mitelman Chairman of the Management Board 01/08/2014 Gints Čakāns Deputy Chairman of the Management Board 01/09/2011 Evija Sloka Member of the Management Board 02/11/2012 5

6 AS EXPOBANK Annual report for year 2016 STATEMENT OF MANAGEMENT RESPONSIBILITY Management of is responsible for the preparation of the consolidated financial statements of the and its subsidiaries ( the ) as well as for the preparation of the separate financial statements of the. The consolidated and separate financial statements have been prepared in accordance with the International Financial Reporting Standards as adopted by the European Union, and comply with legislative requirements of the Republic of Latvia. The consolidated and separate financial statements on pages 10 to 86 are prepared in accordance with source data and present fairly the financial position of the and as at 31 December 2016 and the results of its operations and cash flows for the year ended 31 December The aforementioned consolidated and separate financial statements are prepared on a going concern basis, consistently applying accounting policies in conformity with International Financial Reporting Standards as adopted by the European Union, and relevant legislation of the Republic of Latvia. Prudent and reasonable judgments and estimates have been made by the management in the preparation of the financial statements. The management of is responsible for maintenance of proper accounting system, safeguarding of the s and the s assets, and prevention and detection of fraud and other irregularities. The management is also responsible for operating the and the in compliance with the Law on Credit Institutions, regulations of the Financial and Capital Market Commission of the Republic of Latvia, of Latvia, and other laws of the Republic of Latvia applicable to credit institutions. On behalf of the s and the s management, Chairman of the Management Board Ilya Mitelman Deputy Chairman of the Management Board Gints Čakāns Member of the Management Board Evija Sloka 6 March

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10 CONSOLIDATED AND SEPARATE STATEMENT OF COMPREHENSIVE INCOME Note EUR Interest income 5 4,171 4,571 7,535 8,017 Interest expense 5 (1,818) (1,740) (1,789) (1,782) Net interest income 2,353 2,831 5,746 6,235 Fee and commission income 6 9,826 8,146 7,587 7,425 Fee and commission expense 7 (441) (442) (418) (393) Net fee and commission income 9,385 7,704 7,169 7,032 Net income from transactions with financial instruments 8 6,360 6,112 10,570 10,533 Gain on subsidiary bargain purchase Other income 4, Other expenses 9 (6,826) (1,147) (1,503) (1,246) Total operating income 15,871 15,603 22,676 22,645 Impairment losses (7) (7) General administrative expenses 10 (10,867) (8,633) (6,593) (6,111) Profit before income tax 5,004 6,970 16,076 16,527 Income tax expense 12 (848) (672) (1,137) (1,137) Profit for the year 4,156 6,298 14,939 15,390 Items that may be reclassified subsequently to profit or loss Available-for-sale financial assets net change in fair value Available for sale financial assets reclassified to profit or loss Foreign currency translation differences on foreign operations 1,294 1,294 8,105 8,105 (1,299) (1,299) (2,257) (2,257) (603) - (221) - Other comprehensive income for the year (608) (5) 5,627 5,848 Total comprehensive income for the year 3,548 6,293 20,566 21,238 The accompanying notes on pages 17 to 86 form an integral part of these financial statements. The financial statements as set out on pages 10 to 86 were approved for issue by the Management Board on 6 March Chairman of the Management Board Ilya Mitelman 6 March 2017 Deputy Chairman of the Management Board Gints Čakāns Member of the Management Board Evija Sloka 10

11 CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION Note ASSETS Cash and demand deposits with the of Latvia 13 66,872 66,872 91,404 91,404 Due from financial institutions , , , ,811 Loans and advances due from customers 17 6,337 12,273 24,194 33,183 Available-for-sale instruments 18 35,778 35,778 37,941 37,941 Investment property 16 3,761-3,682 - Deferred tax asset Investments in subsidiaries 19-6,158-5,272 Property and equipment Intangible assets Current income tax asset Other assets 22 17,510 2,978 25,797 2,770 Total Assets 378, , , ,180 11

12 CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION Note LIABILITIES AND SHAREHOLDER S EQUITY Deposits and balances due to financial institutions 23 5,534 5,534 8,268 8,268 Current accounts and deposits due to customers , , , ,043 Provisions Deferred income Deferred tax liabilities Current income tax liabilities Other tax payable 2,029 2,029 1,040 1,040 Other liabilities 26 1,809 1,479 4,361 3,282 Total Liabilities 321, , , ,735 Share capital 11,644 11,644 11,668 11,668 Share premium 6,360 6,360 6,360 6,360 Available for sale financial assets revaluation reserve Foreign currency translation reserve (824) - (221) - Other reserves Retained earnings 39,220 42,039 55,064 55,741 Total Shareholder s Equity 27 57,095 60,738 73,547 74,445 Total Liabilities and Shareholder s Equity 378, , , ,180 Contingent liabilities and commitments , ,229 Funds under trust management , , , ,113 The accompanying notes on pages 17 to 86 form an integral part of these financial statements. The financial statements as set out on pages 10 to 86 were approved for issue by the Management Board on 6 March Chairman of the Management Board Ilya Mitelman Deputy Chairman of the Management Board Gints Čakāns Member of the Management Board Evija Sloka 6 March

13 CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax 5,004 6,970 16,076 16,527 Amortisation and depreciation Interest income (4,171) (4,571) (7,535) (8,017) Interest expense 1,818 1,740 1,782 1,782 Disposal of fixed assets Net (decrease)/ increase in provisions (111) (109) Net decrease in impairment of other assets - - (2) (2) Profit from investment property sale - - (340) - Gain on subsidiary bargain purchase - - (220) - Increase in cash and cash equivalents before changes in assets and liabilities, as a result of ordinary operations 2,964 4,374 10,523 10,979 Decrease in held for trading financial instruments ,893 28,893 Decrease/ (increase) in available-for-sale financial assets 2,293 2,293 (1,325) (1,325) (Increase)/ decrease in due from financial institutions (8,860) (215) 2,520 3,441 Decrease/ (increase) in loans 17,512 20,755 (1,971) (5,480) Decrease/ (increase) in other assets 6,695 (208) (1,634) (1,267) Decrease in current account and deposits due to customers (130,651) (163,915) (23,866) (20,030) Increase/ (decrease) in other liabilities (1,541) (828) 66 2,160 Increase / (decrease) in cash and cash equivalents from operating activities before corporate income tax (111,588) (137,744) 13,206 17,371 Interest received 4,403 4,803 6,368 6,850 Interest paid (1,829) (1,751) (1,766) (1,766) Corporate income tax paid (1,967) (1,967) (543) (543) Net cash and cash equivalents from operating activities (110,981) (136,659) 17,265 21,912 13

14 CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOWS CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment and intangible assets (918) (843) (252) (252) Investment in subsidiary - (886) 46,643 (5,272) Proceeds from sale of investment property - - 1,570 - Purchase of/additions to investment property (154) - (2,274) - (Decrease) / increase in cash and cash equivalents from investing activities (1,072) (1,729) 45,687 (5,524) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (20,000) (20,000) (15,000) (15,000) Borrowings received/ (repaid) - - (1,001) - Decrease in cash and cash equivalents from financing activities (20,000) (20,000) (16,001) (15,000) Net cash flows for the period (132,053) (158,388) 46,951 1,388 Cash and cash equivalents at the beginning of the year 439, , , ,559 Cash and cash equivalents at the end of the year 307, , , ,947 The accompanying notes on pages 17 to 86 form an integral part of these financial statements.the financial statements as set out on pages 10 to 86 were approved for issue by the Management Board on 6 March Chairman of the Management Board Ilya Mitelman Deputy Chairman of the Management Board Gints Čakāns Member of the Management Board Evija Sloka 6 March

15 CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN SHAREHOLDER S EQUITY Balance at 1 January 2015 Note Share capital Share premium Available for sale financial assets revaluation reserve Foreign currency translation reserve Other reserves Retained earnings Total 11,668 6,360 (5,173) ,125 67,981 Total comprehensive income Profit for the year ,939 14,939 Other comprehensive income - - 5,848 (221) - - 5,627 Transactions with shareholders recorded directly in equity Dividends paid (15,000) (15,000) Balance at 31 December ,668 6, (221) 1 55,064 73,547 Total comprehensive income Profit for the year ,156 4,156 Other comprehensive income - - (5) (603) Transactions with shareholders recorded directly in equity Share capital registration in (24) EUR Dividends paid (20,000) (20,000) Balance at 31 December ,644 6, (824) 25 39,220 57,095 15

16 CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN SHAREHOLDER S EQUITY Note Share capital Share premium Available for sale financial assets revaluation reserve Other reserves Retained earnings Balance at 1 January ,668 6,360 (5,173) 1 55,351 68,207 Total comprehensive income Profit for the year ,390 15,390 Other comprehensive income - - 5, ,848 Transactions with shareholders recorded directly in equity Dividends paid (15,000) (15,000) Balance at 31 December ,668 6, ,741 74,445 Total comprehensive income Profit for the year ,298 6,298 Other comprehensive income - - (5) - - (5) Transactions with shareholders recorded directly in equity Share capital registration in EUR (24) Dividends paid (20,000) (20,000) Balance at 31 December ,644 6, ,039 60,738 The accompanying notes on pages 17 to 86 form an integral part of these financial statements. The financial statements as set out on pages 10 to 86 were approved for issue by the Management Board on 6 March Total Chairman of the Management Board Ilya Mitelman Deputy Chairman of the Management Board Gints Čakāns Member of the Management Board Evija Sloka 6 March

17 1 Background Information on the and the (hereinafter the ) was established in the Republic of Latvia on 6 December 1991 as a closed joint stock company. The operates under a banking license issued by the Financial and Capital Market Commission of the Republic of Latvia ( FCMC ) according to which the is allowed to conduct financial services. The principal activities of the involve deposit taking and customer accounts maintenance, local and international money transfers, foreign exchange transactions on behalf of customers, brokerage and investment services, trust, documentary operations and operations with securities and foreign exchange. The activities of the are regulated by the FCMC. In the 2016 the received a permission to open a branch in Luxembourg (the Grand Duchy of Luxembourg) from supervisory authorities in Latvia and Grand Duchy of Luxembourg. The s branch in Luxembourg started its operations on 9 January The s branch in Cyprus is operating since 8 October The has local representative office in Hong Kong (China) since Information about the and its branches, representative office and subsidiaries (together the ): Information about the : Address: Information about the branch: Address: Information about the branch: Address: Information about representative office Address: Information about the first tier subsidiary: Address: Information about the first tier subsidiary: Address: Information about the first tier subsidiary: Address: Information about the second tier subsidiary: Address: Valdemāra iela 19, Rīga, LV-1010, Latvia Cyprus Branch, Agiou Athanasiou, 46, INTERLINK HERMES PLAZA, 1st floor, Flat/Office 101B, 4102, Limassol, Cyprus Luxembourg Branch L-1855 Luxembourg, 35F, avenue J.F. Kennedy representative office in Hong Kong 6/F Citibank Tower, 3 Garden Road, Central, Hong Kong SIA Axi Invest Valdemāra iela 19, Rīga, LV-1010, Latvia SIA Kappa Capital Valdemāra iela 19, Rīga, LV-1010, Latvia Walbrook Capital Markets Limited Northern & Shell building, 10Lower Thames Street, 8th Floor, London EC3R 6AD, United Kingdom Walbrook Capital Markets Nominees Limited Northern & Shell building, 10Lower Thames Street, 8th Floor, London EC3R 6AD, United Kingdom Shareholders On 9 February 2012, Mr. Igor Kim became the sole owner of the. Related party transactions are disclosed in Note

18 2 Basis of preparation (1) Statement of compliance The consolidated and separate financial statements of the and the ( financial statements ) have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ( EU IFRS ), and regulations of the Financial and Capital Market Commission of the Republic of Latvia in force as at the reporting date. The financial statements were approved for issue by the Management Board on 6 March The shareholder has the right to reject these financial statements and request that new financial statements are prepared. (2) Basis of measurement The accounting system of the and is organised in accordance with the legislation of the Republic of Latvia, including requirements applicable to credit institutions operating in Latvia. The financial year of the and the coincide with the calendar year. The consolidated financial statements include financial information of the and the separate financial statements include financial information of the including its branch in Cyprus. The financial statements have been prepared on a historical cost basis for assets and liabilities held for trading assets and available-for-sale assets whose fair value can be reliably estimated, which are carried at fair value. (3) Functional and Presentation Currency The financial statements are presented in thousands of euro ( 000 EUR), unless stated otherwise, being the functional currency of the and the. The functional currency of Walbrook entities are GBP and for other subsidiaries and the s branch in Cyprus is euro. (4) Basis of consolidation (i) Business combinations The accounts for business combinations using the acquisition method of accounting. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. (ii) Subsidiaries Subsidiaries are entities controlled by the. The controls an entity when it is exposed to, or has rights to, variable returns from is involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity-accounted investees are eliminated to the extent of the s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 18

19 2 Basis of preparation, continued (iv) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the s share of the net identifiable assets of the acquired subsidiary/associate/joint venture at the date of acquisition. Goodwill on acquisition of subsidiaries is included in intangible assets. In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the associates or joint venture. Goodwill is allocated to cash-generating units. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Gain on subsidiary bargain purchase arising on an acquisition is recognised immediately in profit or loss. 3 Significant accounting policies The following significant accounting policies have been consistently applied in the preparation of the financial statements. (1) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated into the respective functional currency of the operation at exchange rates published by the European Central at the dates of the transactions, except for Walbrook entities where market rates are used. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Monetary assets and liabilities, including funds under trust management, contingent liabilities and commitments, denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. Foreign currency differences arising on translation are recognized in profit and loss, except for differences arising on the translation of available-for-sale equity instruments which are recognized in other comprehensive income. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currency at the spot exchange rate at the date when the fair value was determined. Exchange rates as of 31 December 2016 and 31 December 2015 were as follows: 31 December December 2015 EUR/USD EUR/RUB EUR/GBP

20 3 Significant accounting policies, continued (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into EUR at exchange rates set by the European Central at the reporting date. The income and expenses of foreign operations are translated into EUR at the exchange dates of the transactions. Foreign currency differences are recognised in Other comprehensive income and accumulated in the translation reserve, except to the extent that the translation difference is allocated to non-controlling interests. When a foreign operation is disposed of in its entirely or partially such that control, significant influence or join control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the disposes of part of its interest in subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the disposes of only part of an associate or joint venture while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognised in Other comprehensive income and accumulated in the translation reserve. (2) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the and the in the management of their short-term commitments. (3) Financial instruments Classification Upon initial recognition, all financial instruments are classified into one of the following categories: Financial assets and liabilities designated at fair value through profit or loss are: held-for-trading financial instruments; financial assets and liabilities designated at fair value through profit or loss upon initial recognition. A financial instrument is classified as held for trading if it is acquired or incurred principally for the purposes of selling or repurchasing in the near term or it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorised as held for trading. The financial instrument may be designated at fair value through profit or loss when: doing so significantly reduces measurement inconsistencies; certain assets are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis; financial instruments containing one or more embedded derivatives that significantly modify the cash flows are designated at fair value through profit or loss. 20

21 3 Significant accounting policies, continued Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: those that the and the intends to sell immediately or in the short-term; those that the and the upon initial recognition designates as at fair value through profit or loss or as available-for-sale; those for which the holder may not recover substantially all of its initial investments, other than because of credit deterioration. Loans and receivables include term deposits due from credit institutions, loans and receivables due from customers, and other financial assets which meet these classification criteria. Loans and receivables are accounted for at amortized cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability. When calculating the effective interest rate, the and the estimate future cash flows considering all contractual terms of the financial instruments, but not future credit losses. Certain expenses, such as legal fees or sales commissions for employees acting as agents or other expenses that are incurred in securing a loan are treated as part of the cost of the transaction. An impairment loss allowance for credit losses is established. For the policy see Note 3.9. Within other financial assets the and the has included balances due from brokerage accounts. These represent s and the s placements with its brokerage partners that are placed with brokers to support the trading activity of the and the. These balances are of short term nature and are accounted for at amortised cost. Available-for-sale financial assets are financial assets classified at inception as available-for-sale or assets other than classified as held-for-trading, held-to-maturity, or loans and receivables. Available-for-sale assets include short-term investments and certain debt and equity securities. Generally, this category is assigned by the and the to financial assets that are held for an indeterminated period of time and may be sold based on liquidity or interest rate needs, or as a result of changes in exchange rates and share prices. Financial liabilities carried at amortized cost represent financial liabilities of the and the other than financial liabilities designated at fair value through profit or loss. This category includes term balances due to credit institutions, customer deposits, and other financial liabilities corresponding to such a classification. Recognition Financial assets and liabilities are recognized in the statement of financial position when the and/or the become a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized in the statement of financial position on the settlement date representing the date when the financial asset is delivered. In the period between the dates of transaction and settlement, the accounts for the changes in the fair value of the received or transferred asset based on the same principles as used for any other acquired asset of the respective category. Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: loans and receivables that are measured at amortized cost using the effective interest rate method; investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. 21

22 3 Significant accounting policies, continued Fair value measurement principles Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a liability reflects its non-performance risk. When available, the and the measure the fair value of a financial instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, the and the establish fair value using a valuation technique. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the and the, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The and the calibrate valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in statement of comprehensive income depending on the individual facts and circumstances of the transaction but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the and the have positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the and the believe a third-party market participant would take them into account in pricing a transaction. A number of the s and s accounting policies and disclosures require the determination of fair value of financial assets and liabilities. The methods described below have been used for the determination of fair values. When applicable, further information about the assumptions made in determining fair values is disclosed in the respective notes. 22

23 3 Significant accounting policies, continued (a) Loans and receivables The estimated fair value of loans and receivables represents the expected discounted amount of estimated future cash flows. The interest rates used to discount estimated cash flows are based on the prevailing money-market interest rates curve plus an adequate credit spread. (b) Shares and other non-fixed income securities The fair value of shares (S.W.I.F.T) and other non-fixed income securities is determined by reference to their quoted bid price at the reporting date, if available. For a non-material amount of non-listed shares, where disposal opportunities are limited, the assumption has been made that the reliable estimate of fair value is not possible. The fair value of S.W.I.F.T shares was determined based on the transfer amount approved for the respective year by the shareholder s meeting, that represents the price for new share allocation and participants quit price. (c) Derivative financial instruments Derivative financial instruments include swaps and futures in foreign exchange and stock markets. The and the classify all derivative financial instruments as financial instruments at fair value through profit and loss. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. (d) Balances due to other credit institutions and customers The estimated fair value of deposits with no stated maturities, which include also non-interest-bearing deposits, is the amount repayable on demand. The estimated fair value of overnight deposits is their carrying amount. The estimated fair value of fixed interest-bearing deposits not quoted in the active market is based on discounted cash flows using interest rates for new debts with a similar remaining maturity. Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in the profit or loss; a gain or loss on an available-for-sale financial asset is recognized in other comprehensive income (except for impairment losses and foreign exchange gains and losses on debt financial instruments) until the asset is derecognized, at which time the cumulative gain or loss previously recognized in equity is recognized in the statement of comprehensive income. Interest in relation to an available-forsale financial asset is recognized as earned in the profit or loss calculated using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in the profit or loss when the financial asset or liability is derecognized or impaired, and through the amortisation process. Derecognition The derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. The and also derecognize certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. 23

24 3 Significant accounting policies, continued Repurchase and reverse repurchase agreements Securities sold under sale and repurchase ( repo ) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase price represents interest expense and is recognized in the statement of comprehensive income over the term of the repo agreement using the effective interest rate method. Securities purchased under agreements to resell ( reverse repo ) are recorded as amounts receivable under reverse repo transactions. The differences between the purchase and resale prices are treated as interest income and accrued over the term of the reverse repo agreement using the effective interest method. If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. Derivative financial instruments Derivative financial instruments include currency swaps and forward contracts. Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognized immediately in the statement of comprehensive income. Derivatives may be embedded in another contractual arrangement (a host contract ). An embedded derivative is separated from the host contract and it is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognized in the statement of comprehensive income. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. Although the and trade with derivative instruments for risk hedging purposes, the and do not adopt hedge accounting. Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 24

25 3 Significant accounting policies, continued (4) Property and equipment Items of property and equipment are stated at cost including direct costs, net of accumulated depreciation and impairment losses, if any. When an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Land is not depreciated. The estimated useful lives are as follows: Furniture and equipment Computers and equipment Software inseparable from equipment (OEM software) 2 to 10 years 4 years 4 years Leasehold improvements are capitalised and depreciated over the remaining lease period on a straight-line basis. Leasehold improvements are not depreciated as long as the respective assets are not completed. An item of property and equipment is derecognized upon disposal or when the asset is no longer in use and no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset calculated as the difference between the net disposal proceeds and the carrying amount of the item upon disposal is included in the statement of comprehensive income. Depreciation methods, useful lives, and residual values are reviewed annually. (5) Intangible assets Intangible assets are identifiable non-monetary assets without physical substance (licences and software that are separately identifiable from electronic devices, etc.) held for rendering of services or other purposes if it is expected that an economic benefit attributable to these assets will flow to the and/or the. Intangible assets are stated at cost less accumulated amortisation and impairment losses and are amortized over the useful life of the asset. The useful life of each class of intangible assets is estimated, considering the contractual conditions, and/or based on the estimated period over which the asset is expected to generate economic benefits. The estimated useful lives are as follows: Software Mastercard licence Other licences 5 years 10 years 5 years Licences acquired by the and the for a period up to one year are expensed as acquired. Amortisation methods and useful lives are reviewed annually. (6) Investments in subsidiaries Investments in subsidiaries are initially recognized at cost in the s separate financial statements. If the recoverable value of such investments at the balance sheet date is lower than the acquisition cost or valuation in the previous year s balance sheet, impairment loss is recognized and investments are reduced to the recoverable value. 25

26 3 Significant accounting policies, continued (7) Investment property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost less impairment. The annual depreciation rate applied to investment properties, except for land which is not depreciated, is 2%. (8) Leased assets and lease payments Where the and the is a lessor in a lease which transfers substantially all the risks and rewards incidental to ownership to the lessee, the assets leased out are presented as a finance lease receivable and carried at the present value of the future lease payments. Finance lease receivables are initially recognised at commencement (when the lease term begins) using a discount rate determined at inception (the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease). The difference between the gross receivable and the present value represents unearned finance income. This income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Incremental costs directly attributable to negotiating and arranging the lease are included in the initial measurement of the finance lease receivable and reduce the amount of income recognised over the lease term. Finance income from leases is recorded within in profit or loss for the year. (9) Impairment and calculation of the recoverable amount Financial assets carried at amortized cost The and the assess at each reporting date whether there is any objective evidence that financial assets are impaired. Financial assets are impaired when objective evidence exists that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be estimated reliably. The criteria that the and the use to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal and/or interest; Cash flow difficulties experienced by the borrower; Breach of the loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower s competitive position; Deterioration in the value of collateral; Downgrading below investment grade level. The and the first assess whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for those that are not individually significant. If no objective evidence of impairment is determined for individual assets, whether significant or not, the impairment is tested collectively for groups of assets with similar credit characteristics, excluding assets for which an impairment loss is or continues to be recognized on an individual basis. 26